Financial Performance Indicators (FPIs)

The way to determine if a health care organization is operating in an effective and efficient manner is through the use of financial performance indicators (FPIs). The review of the balance sheet, income statement, and cash flow statement is an essential and fundamental task to analyzing the financial performance of any health care organization. But this is only the beginning for successful financial management and analysis. The number and types of users of a health care organization's financial statements include management, board of directors, creditors, investors, government bodies, grant-making agencies, and the general public. Unless a user is well trained in finance or business administration, the financial information found in these statements may seem an endless array of numbers with little meaning.

An analysis of FPIs gives the user a measure of the organization's performance. The primary sources of data for calculating these indicators come from the basic income statement, balance sheet, and cash flow statement. However, FPI analysis is not just comparing different numbers from the balance sheet, income statement, and cash flow statement. It is comparing the numbers against previous years, other peer health care organizations, the industry, or even the economy in general. FPIs look at the relationships between individual values and relate them to how a health care organization has performed in the past and might perform in the future. For example, current assets alone do not tell a lot, but when they are divided by current liabilities, a user can determine whether the organization has enough assets to cover short-term debts. FPIs may provide the very important early-warning indications that allow financial and other business problems to be identified, thus allowing early corrective action by management.

FPIs can be classified into several major categories, including profitability indicators, liquidity indicators, capital structure indicators, asset efficiency indicators, and other financial indicators.

Profitability indicators are an important concept in any industry or any organization. Few health care organizations could remain financially viable without a profit (or excess of revenues over expenses), especially over a long period of time. For instance, cash flow would not be sufficient to meet normal cash requirements such as debt principal repayment and investment in fixed or current assets. The presence or absence of profit has a pervasive effect on most other FPIs. Low values of profit may adversely affect liquidity indicators and reduce debt repayment ability.

Examples of FPIs that measure profitability include the following:

Total margin (the desired trend is an increasing value) = excess of revenues over expenses/total revenues

Return on equity (the desired trend is an increasing value) = excess of revenues over expenses/net assets

Economic value added (EVA) (the desired trend is an increasing value) = net operating profit after taxes (NOPAT)/NOPAT – cost of capital

Liquidity indicators measure the ability of an organization to meet its short-term obligations. Most organizations experience financial problems because of a liquidity problem, which is when they are unable to pay current obligations as they become due. A worsening liquidity position may be the first indication that the organization has serious underlying problems.

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